Carrying Debt is Dangerous
In today's world, it is easy to act much wealthier than you really are. If you want to buy something that you don't have enough money for, you can usually take out a loan or swipe your credit card. You then are able to have whatever the thing is that you wanted to buy, and you know that in the future you will have to pay down your credit card or loan balance. This is almost always a terrible idea.
1. Debt Costs More Tomorrow
While the thrill of having a new car, wardrobe or whatever else you just bought might be nice, the cost of those debt-driven purchases will cost you much more in the long run. For example, say that you run up a balance of $5,000 on your favorite credit card and decide that you will pay the minimum each month.
In this scenario, we will assume that you credit card has a very average interest rate of 18.9% and that you will pay $150 per month. Your $5,000 balance becomes over $10,000! Over the duration of time that you are paying down the balance on your card, you will end up paying more than twice the amount that you originally spent. And on top of that, it will take you over 17 years to pay down a very small debt of $5,000, and this assumes that you immediately stop using your credit card.
Perhaps even more alarming than the fact that it will take you nearly two decades to pay off $5,000 is the fact that most of the debt won't go away until the end of the 17 years. This is because of something known as loan amortization. Basically, toward the beginning of the loan, most of your payments go toward the interest on the loan, not the debt itself. Each subsequent payment shifts toward paying a little less interest and a little more of the loan itself. Your loan payment shown in a graph actually looks a little bit like this. After 13 years of paying off your debt, you will still owe more than half of the total.
2. Debt Limits Choice
If you are saddled with debt, it becomes much harder to reach financial freedom. Banks, credit card companies, car dealerships and everyone else are all much less likely to loan you new money if you already have a lot of debt. This means in effect that you force your future self to suffer so that you present self can enjoy a new pair of shoes or whatever else you have chosen to buy.
Being trapped with debt also means that you have to earn enough money to cover your debt payments. This could mean being trapped in a job that you hate or even working multiple jobs. If you are able to get your debt under control, life becomes much less expensive and you suddenly have many more options for how to spend your time.
3. Paying More Now Saves Big Money Later
Think back to our example of a $5,000 credit card balance. If we keep all of the variables the same, but change only the interest rate, the entire picture starts to look much different. If you are able to pay $300 per month instead of $150, you save $3,500 and 10 years. You might argue that it could be difficult to find an extra $150 per month to put towards existing debt, but being debt-free 10 years sooner certainly sounds like a great reason to try.
The best case scenario is to stay out of debt altogether, but for those who are already struggling with indebtedness, your best bet is to pay off your balances as quickly and aggressively as possible.